Shopify Inc. (NYSE:SHOP) is a top provider of e-commerce infrastructure, giving its clients the resources they need to launch, develop, advertise, and run a retail company of any size.
Even if this founder-led company’s profits may have skyrocketed throughout the pandemic, its 2022 has been exceedingly challenging.
Shopify has been harmed by a reopening world that is less dependent on e-commerce and growing economic instability, and recent reports of a 10% staff layoff have only deepened the gloom about this company.
Currently, investors are hoping that Shopify’s Q2’22 results will quell the unfavorable sentiment, but have their hopes been granted? Let’s look at it.
Overview of Earnings
Shopify’s management team doesn’t provide precise revenue or EPS predictions, so the only way to compare is against analyst estimates, and regrettably, Shopify failed to meet these targets. Analysts had predicted revenue of €1.33 billion, but Shopify came in at €1.295 billion, missing the mark by €35 million.
The picture for Shopify doesn’t get any better as you move lower down the income sheet. Although it is not surprising, gross profit margins decreased from 56 percent in Q2’21 to 51 percent this quarter. This is because revenue growth for lower-margin Merchant Solutions continues to surpass that of Subscription Solutions.
However, it’s still not a good indicator because, when segmented, gross profit margins in Q2’22 were lower than margins in both 2020 and 2021. Shopify witnessed reduced margins in Shopify Payments this quarter as a result of the merchant and card mix, as well as extra costs within gross profit related to investments in cloud infrastructure.
On the financial front, Shopify experienced a loss for the quarter, with adjusted EPS of -$0.03 falling short of analysts’ forecasts of €0.03. The company invests the money it produces back into the company, but that doesn’t imply it isn’t prudent with cash as evidenced by the recent decision to reduce headcount by 10%; more on that later.
Due to its equity interests, particularly its position in Affirm, investors may want to treat Shopify’s net income with a very large grain of salt (NASDAQ:AFRM). Current increased net income in Q2 of 21 by $780 million while reducing it by $1 billion in this quarter.
Time To Put Things In Perspective
Let’s face it: Being a shareholder in Shopify has been a miserable year. High-growth digital companies have significantly reduced their spending, and Shopify in particular has seen a number of challenges in 2022. Consumers are suffering from inflation, SMBs are more likely to suffer from a recession, a high dollar makes it harder for Shopify to make money abroad, and after two years of a boom, e-commerce penetration has significantly slowed down.
But there is good news behind the dark clouds. The company’s balance sheet is very strong, and the long-term benefits of expanding e-commerce use won’t fade away. Even though the company cannot directly influence the macro environment, it is flourishing when others are failing.
Despite having a challenging quarter, Shopify is still growing faster than its competitors. Rather than a faltering business in a momentarily flourishing market, it would seem that this is still a terrific company.
The 10% decrease in headcount is another factor to consider. E-commerce growth had been consistent and predictable prior to the pandemic. Was this increase going to be a one-off event or the new norm?
It is now obvious that the mix is now roughly returning to where pre-Covid data would have indicated it should be at this point, which is what we are seeing now. Still expanding steadily, however, there wasn’t a significant 5-year advancement.
This is important because market share in e-commerce is significantly larger than it is in retail.
New Markets & New Solutions
Despite the challenging macroeconomic situation, Shopify launched new solutions and kept on innovating during the quarter.
In its semi-annual product display, the Summer ’22 Shopify Editions, it introduced more than 100 upgrades, new products, and improvements. One of the most notable updates is the direct integration of B2B capability into the Shopify platform.
Another is the addition of a Twitter (TWTR) Shopping channel, which allows businesses to reach customers directly from their Twitter profiles.
The bottom line is there are good things happening at Shopify, you just have to look a little harder to find them.
Featured Image: Megapixl @Mohammedsoliman4